Despite the fact that corporations and interest groups spent about $30 billion lobbying policy makers over the last decade (Center for Responsive Politics, 2012), there is a lack of robust empirical evidence on whether firms’ lobbying expenditures create value for their shareholders. Moreover, while the public perception of the lobbying process is that it involves unethical behavior that may bias rather than inform politicians, this is difficult to show since unethical practices are not typically observable. In our recent ECGI working paper, The Corporate Value of (Corrupt) Lobbying, we identify events that exogenously affect the ability of firms to lobby, and find that firms that lobby more experience a significant decrease in market value around these events. Investigating the channels by which lobbying may add value, we find evidence suggesting that the value partly arises from potentially unethical arrangements between firms and politicians.

On January 3, 2006, the prominent Washington D.C. lobbyist Jack Abramoff pleaded guilty to bribing government officials in exchange for favorable decisions made on issues related to his clients’ interests. Described as the “biggest public corruption scandal in a generation,” (“Case bringing new scrutiny to a system and a profession,” The Washington Post, January 4, 2006), the guilty plea generated intense public scrutiny of the lobbying process, making it damaging for politicians to be associated with lobbyists. For example, describing the response to the Abramoff guilty plea one lobbyist noted: “In the short run, members of Congress will get allergic to lobbyists…They’ll be nervous about taking calls and holding meetings, to say nothing of lavish trips to Scotland. Those will be out.” (The Washington Post, January 4, 2006).

Using Mr. Abramoff’s guilty plea to bribery and corruption as an exogenous negative shock to the ability of firms to lobby, we use data on all firms in the S&P 500 index between 2000 and 2008, and examine their market-adjusted cumulative abnormal returns in a 3-day window around this event. The results show that firms that spend more on lobbying experience a significantly greater decrease in value in response to the guilty plea. To illustrate, for the sample of firms that lobby, we find that a standard deviation increase in average lobbying expenditures (about $6.8 million) prior to the event year, is associated with an average decrease in abnormal returns of 0.20%, or about $49.8 million, in the 3-day window around the event. We also show that firms that employed members of Jack Abramoff’s team as lobbyists experience a greater decrease in value in response to the guilty plea, corroborating that we capture the effects of the guilty plea, and not concurrent events.

Since data on unethical lobbying activities are not directly observable, we hypothesize that firms that are more likely to be involved in unethical business practices may also be more likely to engage in unethical lobbying, and investigate whether these firms are differently affected by the guilty plea. We use several variables to identify a firm’s propensity to engage in unethical behavior. Using SEC enforcement actions against firms for violations such as insider trading, accounting fraud, and bribery to identify firms that are more likely to engage in unethical practices, we show that the value loss associated with lobbying activity around the guilty plea is greater for firms charged with violating SEC rules. Based on the argument that firms with weak policies against bribery and corruption may be more likely to engage in unethical practices, we also show that the lobbying-related loss of value around the scandal is significantly greater among firms with a weak code of ethics. We obtain similar results for firms with a poor reputation for corporate social responsibility.

Lastly, we show that firms that lobby more experience a greater decrease in value in response to legislative efforts to restrict corruption in lobbying. To test the value from potentially unethical lobbying practices we consider the market response to the first lobbying-related bill voted on by the U.S. Congress following the guilty plea, the “Lobbying Transparency and Accountability Act of 2006”, which targeted corruption in lobbying by increasing penalties for lobbyists who violate lobbying rules, and curbing quid pro quo arrangements between lobbyists and government officials. Since firms engaged in legitimate lobbying are less likely to be affected by restrictions on corrupt lobbying, this result provides further evidence that part of the value from lobbying may arise from potentially unethical arrangements with policy makers.

To the best of our knowledge, this is the first paper to use an exogenous shock to identify the shareholder value of corporate lobbying, and to provide evidence suggesting that part of this value may be attributed to unethical practices that are likely to bias politicians rather than simply inform them.